TREASURY INSPECTOR GENERAL FOR TAX
ADMINISTRATION
Opportunities Exist to Improve Manual Interest Calculations on
Estate Tax Returns
Issued on August 30, 2007
Highlights
Highlights of
Report Number: 2007-30-163 to the
Internal Revenue Service Commissioner for the Small Business/Self-Employed Division.
IMPACT ON TAXPAYERS
Because of the complexities involved in administering
payment options on estate tax accounts involving Internal Revenue Code (I.R.C.)
Section 6166 elections, Internal
Revenue Service (IRS) computers are not programmed to assess the interest
associated with these accounts. The
interest must be calculated manually and is subject to human error. If interest amounts owed by taxpayers are not
calculated accurately, the IRS risks collecting too little or too much money
from taxpayers whose account balances are calculated in error. Interest had been calculated inaccurately on
16 percent of the estate tax cases included in our review.
WHY TIGTA DID THE AUDIT
This audit was initiated because, in a prior audit, TIGTA had
determined improvements could be made in the manual calculation of interest. The overall objective of this review was to
determine whether interest was being calculated correctly for estates that have
elected to pay the taxes due in installments or elected an extension of time to
file or pay.
WHAT
TIGTA FOUND
In
Calendar Years 2002 and 2003, the processing and administration of estate tax
returns was consolidated from 10 IRS campuses to the Cincinnati Campus in
A qualifying
estate may elect under I.R.C. Section 6166 to pay in installments that portion
of its Federal estate tax attributable to a closely held business. Because of the complexities involved in administering
payment options on these accounts, IRS computers are not programmed to assess interest
on them. Interest must be calculated
manually and assessed annually by an IRS interest specialist.
TIGTA
reviewed a statistically valid sample of 99 estate tax cases involving I.R.C.
Section 6166 elections for which interest had to be manually computed. Interest on 16 (16 percent) of these cases was
calculated in error. On 10 of the error
cases, estates were undercharged interest totaling $81,677. On the other 6 error cases, interest was
overcharged by $3,161. Of the 16 errors
identified, 9 were made by other IRS campuses prior to the cases being
consolidated in the Cincinnati Campus.
These errors
were not identified because the Estate and Gift Operations function at the
Cincinnati Campus updates interest for the yearly billing statements by
computing interest from the previous IRS billing (as opposed to the due date of
the return), as outlined in the Internal Revenue Manual. In addition, these cases were not subject to
their own quality review by those qualified to determine if the interest was
computed correctly.
WHAT TIGTA RECOMMENDED
TIGTA recommended the IRS (1) implement a quality review
process of yearly manual interest calculations on estate tax cases and ensure
personnel assigned to perform these reviews have the skills and expertise to
identify whether interest has been computed correctly and (2) implement a
procedure involving periodic manual calculation of interest on each estate tax
return from the due date of the return.
In their response to the report, IRS officials agreed with
the first recommendation and partially agreed with the second recommendation. They plan to establish a quality review
process and identify qualified staff to conduct regular reviews of a sampling
of estate tax cases with manual interest computations. They also plan to review the interest
computations on I.R.C. Section 6166 installment cases every 3 years to 5 years,
with the initial review checking the calculations from the due date of the estate
tax return. However, for subsequent
reviews, the IRS plans to check computations made since the previous
review. Although IRS management did not
fully agree with the second recommendation, TIGTA found their alternative
corrective action to be satisfactory.
READ THE
FULL REPORT
To view the report,
including the scope, methodology, and full IRS response, go to:
http://www.treas.gov/tigta/auditreports/2007reports/200730163fr.html.
Email
Address: Bonnie.Heald@tigta.treas.gov
Phone Number: 202-927-7037
Web Site:
http://www.tigta.gov